General principles
In All Class Insurance Brokers Pty Ltd [in Liq] v Chubb Insurance Australia Ltd,[1] Allsop CJ wrote in respect of the well settled principles:
[40] Where the applicant is a corporation, the Court is empowered to order security for costs pursuant to s 1335 of the Corporations Act if “it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant”. Once this threshold is met, the Court will turn to the matters relevant to the exercise of its discretion to order security for costs: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301.
“If the evidence does not permit a conclusion of stultification that does not make the impecunosity of the party and the difficulties in providing security (such as they are proved) irrelevant”
[41] Section 56 of the Federal Court of Australia Act does not expressly impose any threshold to be met before the Court considers the various discretionary matters. However, the applicant’s inability to pay the costs of the respondent remains an important consideration in the exercise of the Court’s discretion.
[42] The Court’s discretion to require the provision of security for costs is broad and the factors informing the exercise of that discretion cannot be stated exhaustively. The only limitation is that the discretion be exercised judicially: Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; 2 FCR 1 at 3 . The matter which lies at the heart of the discretion is one of fairness, both in terms of whether security should be granted, and if so, in what amount: Madgwick v Kelly [2013] FCAFC 61; 212 FCR 1 at 21 [92]. The Court aims to achieve a “balance between ensuring that adequate and fair protection is provided to the defendants, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings”: Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470 (Giles J).
[43] The Court’s discretion should be exercised having regard to all of the circumstances of the case (see Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] HCA 41; 193 CLR 502 at 513 [26] (Kirby J)). There are a number of well-established factors relevant to the Court’s exercise. These include (see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189 at 197 –198 per Beazley J): whether the application for security for costs has been brought promptly; the strength and bona fides of the applicant’s case; whether the applicant’s impecuniosity was caused by the respondent’s conduct subject of the claim; whether the respondent’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate; and whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security.
[44] An additional factor to add to this list is whether there are aspects of public interest which weigh in the balance against the making of an order (see Equity Access Ltd v Westpac Banking Corporation [1989] FCA 520; ATPR 40–972 at 50,635 per Hill J).
Stultification
An issue which occasionally arises is that of “stultification”; that is, the inevitable non-satisfaction of the ordered security would serve to preclude the pursuit of what is a prima facie good cause of action. While that may seem a self-evident consequence, the issue is one of substance.
“… the circumstance of there being a complete identity between the corporate plaintiff and the individual plaintiff so that all plaintiffs are suing in relation to one and the same defendant and all plaintiffs must succeed or fail together.”
In Madgwick v Kelly,[2] Allsop CJ and Middleton J wrote:
[81] The respondents submitted that the characteristics of the group were relevant to the question of stultification. The onus of establishing that the making of an order would stultify the suit rests on the party resisting security: Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 at 4; 52 ALR 176 at 179 (Bell Wholesale); Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd (2007) 65 ACSR 383; 25 ACLC 1707; [2007] NSWCA 344; Green at [45] and [82]. That proposition is, to a degree, uncontroversial. A failure to prove stultification does not mean, however, that security must be provided. Indeed, as Hodgson JA (sitting alone as referrals judge) said in Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [26] (Dae Boong), if the evidence does not permit a conclusion of stultification that does not make the impecunosity of the party and the difficulties in providing security (such as they are proved) irrelevant. As Hodgson JA said, if those who stand to benefit from the proceedings are reasonably unwilling, even though possibly able, to provide security, that may be a factor to be taken into account.
[82] These considerations are especially apt to consider in a class action for the kinds of reasons referred to by the primary judge. The group members may or may not be willing to disclose their assets. They have no obligation to do so. The group members may be largely unidentified. The kinds of considerations to which the primary judge referred may not be sufficient to ground a defensible finding on likely stultification (to which question, we will come), but they are not irrelevant to the overall exercise of discretion. The generality of the discretion in s 56 should not be lost sight of. In Dae Boong, (although in the context of an application for security for costs pursuant to s 1335(1) of the Corporations Act) Hodgson JA went to the heart of the discussion in terms particularly apt for adoption in group proceedings when he said at [27]:
Ultimately it seems to me the question to be determined by the court is whether it is fair that the person being sued by the company should be in the position of having to incur substantial costs, in this case perhaps tens of thousands of dollars of costs, and being at risk of liability for the company’s costs, and yet have no real chance of recovering costs even if the action is unsuccessful, when there are persons who would benefit from the proceedings, who face no risk of liability for costs themselves and are either unwilling or unable to provide security.
[83] Thus, it was not wrong for the primary judge to take into account the subject of unwillingness of people to contribute as a relevant factor. This has support in a number of cases: BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 344–345; Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 at 515; and Jeffcott Holdings Ltd v Paior (1997) 15 ACLC 28 at 32. Of course, unwillingness in itself is not determinative, and the question of the reasonableness of any unwillingness to contribute must be considered in determining what is fair in all the circumstances. In the context of the applications for security for costs brought in these related class actions, the reasonableness of requiring people to contribute (and to what extent) was an important factor to consider in the context of Pt IVA.
The issue of onus of proof of stultification burdening plaintiff or defendant is the subject of a reserved appeal from the decision of Markovic J in St Mary’s Hog’s Pty Ltd v HBCA Pty Ltd.[3]
Corporate and natural person plaintiffs
What of the case where the plaintiffs – or appellants – consist of both a natural person and a corporation?
The recent decision of Leeming JA in Hung v Aquamore Credit Equity Pty Ltd[4] involved an application for security made in the New South Wales Court of Appeal by an appeal respondent against the natural person and corporate appellants. It will be remembered that security is rarely awarded against a natural person. In this regard, in St Mary’s, Markovic J pithily summarised the relevant law (at [135]):
There is a disinclination to order an individual applicant to provide security, at least, in the absence of a factor in addition to impecuniosity: see Knight v Beyond Properties Pty Ltd [2005] FCA 764 at [32]. At [33] of Knight Lindgren J identified the types of additional factors, in addition to impecuniosity, which had persuaded courts to make an order for security against natural persons. They were: where the individual is resident outside Australia; bringing a claim to a significant extent for the benefit of others; failure to show that an order would stultify a proceeding and that the sum ordered was not oppressive; and lack of prospects of success and large costs involved to defendants.
Refusing security, Leeming JA, with reference to authority, predicated a further exception, precluding an award of security where there was a natural person plaintiff in addition to a corporate plaintiff, but solely in:[5]
… the circumstance of there being a complete identity between the corporate plaintiff and the individual plaintiff so that all plaintiffs are suing in relation to one and the same defendant and all plaintiffs must succeed or fail together. Brereton J said that in those circumstances “security will not ordinarily be ordered against only one of them”.[6]
So much reflects the Queensland jurisprudence. In Whitelaw v Hookey,[7] Morrison JA collected and applied that jurisprudence in a case where the appellants were a natural person and an associated corporation:
[18] Senior Counsel for the appellants submitted that there was almost a complete overlap between the issues to be agitated on the part of Mr Hookey, and those on behalf of KAHI. Thus it was contended that this was a case where any costs order would be made against Mr Hookey in any event, and since he was a primary protagonist and not simply standing behind the corporate appellant, this was not an appropriate case for security for costs.
[19] The principles applicable on this issue appear in Molony v ACN 009 697 367 Pty Ltd (in Liq) [2003] QCA 120 at [22]-[25] and [29] by reference to the judgment of Connolly J in Harpur v Ariadne Australia Ltd [1984] 2 QdR 523 at 531-2. Harpur v Ariadne established that if there were two parties, one corporate and one who litigated in person and was a person of substantial means, it was inappropriate to order security for costs against the corporate defendant even though, looked at in isolation, such an order could be justified against them. However, that was only applicable if each of the appellants was liable to the whole of the costs. In other words, it was applicable where there was a complete overlap between the interests of the two parties. As was said by White J (as her Honour then was) in Molony: “Where there is more than one plaintiff there must be a coincidence of interest”: at [29]
[20] This is not a case where there is a coincidence of interest. By reference to the originating application one is able to identify various forms of relief which are sought only by Mr Hookey, and not by KAHI. Those issues are substantial, consisting of a declaration that Mr Whitelaw holds half of his shares in the second defendant on constructive trust for Hookey, and consequential orders compelling their transfer. Further, paragraph 4H(b) claims the payment of $1,000,000 to Mr Hookey.
(emphasis added)
“If contrary to what I have already decided this were a case for security for costs, I would, in the exercise of my discretion, order none. That is because, irrespective of the reason such a wildly exaggerated estimate was deposed to, it is quite wrong for such estimates to be propounded in this Court.”
Excessive security quantum demands
In Hung, Leeming JA also raised an issue concerning the estimate of costs sworn to by the respondents for a two-day appeal, namely no less than $434,461. Somewhat ominously, Lemming JA wrote:[8]
Something needs to be said about the estimate of costs…I have already mentioned that counsel did not seek to defend a substantial amount of the costs to which the solicitor for the respondents … deposed.
Leeming JA noted the estimate was made at an early stage of the appeal when it was not clear as to whether the appeal would be one or two days and was “prepared at a time when there were uncertainties, including the possibility of an amendment to the notice of appeal”.[9] His Honour, however, observed “…many of the estimates of costs bear no relationship with the realities of defending an appeal”.[10]
His Honour wrote:
[23] I do not seek to be exhaustive in identifying the items which Mr Hogan — Doran SC, once they were pointed out to him, very properly accepted should not be included in the total. The result was that he accepted that more than a quarter of a million dollars of estimated costs contained in Mr Seelenmeyer’s affidavit could not be justified. The concession was, self-evidently, properly made; it is absurd to think that the respondents to a one or even a two day appeal could properly incur costs of $434,461 or anything like that amount.
[24] The reason for what was concededly a very substantially overinflated amount of the respondents’ costs being included in this application for security for costs — something which was pointed out pithily by the appellants’ written submissions — is not known to me. One possibility is that the deponent was incompetent or completely unfamiliar with the ordinary course of litigation in the Court of Appeal. Another possibility is that those costs or something like them will in fact be incurred, in which case there would be what could only be described as massive overcharging of the client. A third possibility is that the affidavit has been prepared with a view to very substantially inflating the likely costs, in order to obtain either by compromise or by Court order a much greater award of security than that to which the respondents would otherwise be entitled.
[25] I do not know and I express no view as to whether any of those possibilities be the case. There may be other possibilities for the inflated estimates, although I made it plain during the hearing, including by giving what turned out to be a significant adjournment to permit anything that could be said in relation to those estimates being put to me. No attempt was made to produce any further evidence or explanation, save for what was said from the bar table to which I have already referred. But whatever be the reason, the fact is that the estimates are grossly inflated, far beyond the realm of what might be reasonably arguable as an estimate of the costs of an appeal.
[26] I mention all of those things for this reason. If contrary to what I have already decided this were a case for security for costs, I would, in the exercise of my discretion, order none. That is because, irrespective of the reason such a wildly exaggerated estimate was deposed to, it is quite wrong for such estimates to be propounded in this Court. The respondents seek a discretionary order, but rely on an obviously untenable evidentiary basis for an essential element of the order they seek. As much was pointed out to them in advance of the hearing. No attempt was made to attend to the self-evident deficiencies in the evidence. A less unrealistic amount of security might be $50,000 or $70,000, as was pointed out in the appellants’ submissions, but why should even that amount be ordered when the moving party has so grossly inflated its estimate of its own costs?
[27] The real issues in dispute are raised on the notice of appeal and the respondents’ cross-appeal from the declaration that their interest rate of some 79% per annum is an unenforceable penalty. The costs of the appeal are well removed from the real issues. The provision of security for those costs is still further removed. It is difficult to see how what has occurred on this motion could accord with the overriding purpose and the obligations to which both the respondents and their lawyers are subject in s 56 of the Civil Procedure Act. Estimates such as the grossly inflated estimates on which the respondents relied are also apt to produce disputes which cannot be resolved; hence the two hours we have spent this morning dealing with this application.
[28] Such complaints are not new. They were explained more concisely than I have managed to achieve by Young JA in Nicholls v Michael Wilson & Partners Ltd [2010] NSWCA 100 at [11] –[16] more than a decade ago. So far as I can see the situation has not improved subsequently; to the contrary.
[29] For those reasons I dismiss the notice of motion filed 6 May 2022.
…
[31] … The order of the Court is notice of motion filed 6 May 2022 dismissed with costs. Despite what I just said and the tone of it, I could not have dealt with the motion today but for the assistance I’ve received from those at the bar table and those instructing them. I’m grateful for that.
(emphasis added)
Hung is a timely reminder for counsel for an applicant, once briefed, to give timeous and reasonable consideration to evidentiary content and sufficiency – whether estimates of costs for security, or otherwise – before such an application is filed, or if briefed after filing then, if necessary, seek an adjournment to effect evidentiary “repair”. If that proves abortive, independent candour with the court must ensue as to such content (as occurred on the part of counsel in Hung).
The price of ignoring these steps may be not just lack of success in garnering the security relief together with an order for costs against the applicant, but also a possible stain on counsel’s professional reputation as an advocate.
Editor’s note:
On 26 September 2022, the Full Court of the Federal Court – in a decision going by the name Goodwin v HBCA Pty Ltd – dismissed an appeal from the decision in St Mary’s Hog’s Pty Ltd v HBCA Pty Ltd [2022] FCA 52,referred to in the above article. The issue is further discussed in an item in Hearsay Issue 91.
[1] [2020] FCA 840
[2] (2013) 212 FCR 1
[3] [2022] FCA 52
[4] [2022] NSWCA 123 (4 July 2022).
[5] Including Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [27] – [28].
[6] Ibid at [16].
[7] [2020] QCA 145.
[8] At [21].
[9] Ibid.
[10] At [22].
